JUNIATA VALLEY FINANCIAL CORP - Quarter Report: 2009 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-13232

Juniata Valley Financial Corp.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2235254
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

Bridge and Main Streets, Mifflintown, Pennsylvania		17059
(Address of principal executive offices)		(Zip Code)

(717) 436-8211

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of August 7, 2009
Common Stock ($1.00 par value)		4,336,129 shares

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of June 30, 2009 and December 31, 2008 (Unaudited)			3
Consolidated Statements of Income for the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)			4
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2009 and 2008 (Unaudited)			5
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			30
Signatures			31
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

Juniata Valley Financial Corp. and Subsidiary

(Unaudited, Dollar amounts in thousands, except share data)

		June 30,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	9,282			$	12,264
Interest bearing deposits with banks			252				193
Federal funds sold			7,500				—
Cash and cash equivalents			17,034				12,457
Interest bearing time deposits with banks			5,325				5,325
Securities available for sale			74,331				64,321
Restricted investment in Federal Home Loan Bank (FHLB) stock			2,197				2,197
Investment in unconsolidated subsidiary			3,270				3,176
Total loans, net of unearned interest			307,745				315,132
Less: Allowance for loan losses			(2,496	)			(2,610	)
Total loans, net of allowance for loan losses			305,249				312,522
Premises and equipment, net			7,118				7,374
Bank owned life insurance and annuities			12,827				12,582
Core deposit intangible			321				344
Goodwill			2,046				2,046
Accrued interest receivable and other assets			6,210				5,740
Total assets		$	435,928			$	428,084
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	51,663			$	54,200
Interest bearing			320,594				302,831
Total deposits			372,257				357,031
Securities sold under agreements to repurchase			1,718				1,944
Short-term borrowings			—				8,635
Long-term debt			5,000				5,000
Other interest bearing liabilities			1,118				1,096
Accrued interest payable and other liabilities			6,417				5,893
Total liabilities			386,510				379,599
Stockholders’ Equity:
Preferred stock, no par value:
Authorized — 500,000 shares, none issued			—				—
Common stock, par value $1.00 per share:
Authorized — 20,000,000 shares
Issued — 4,745,826 shares
Outstanding —
4,342,587 shares at June 30, 2009;
4,341,055 shares at December 31, 2008			4,746				4,746
Surplus			18,294				18,324
Retained earnings			35,684				34,758
Accumulated other comprehensive loss			(1,264	)			(1,247	)
Cost of common stock in Treasury:
403,239 shares at June 30, 2009;
404,771 shares at December 31, 2008			(8,042	)			(8,096	)
Total stockholders’ equity			49,418				48,485
Total liabilities and stockholders’ equity		$	435,928			$	428,084

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Dollar amounts in thousands, except share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Interest income:
Loans, including fees		$	5,256			$	5,497			$	10,545			$	11,023
Taxable securities			320				394				628				840
Tax-exempt securities			278				282				559				528
Federal funds sold			58				44				114				114
Other interest income			3				66				5				141
Total interest income			5,915				6,283				11,851				12,646
Interest expense:
Deposits			1,821				2,294				3,699				4,740
Securities sold under agreements to repurchase			—				18				1				44
Short-term borrowings			—				1				1				1
Long-term debt			35				—				69				—
Other interest bearing liabilities			6				7				11				16
Total interest expense			1,862				2,320				3,781				4,801
Net interest income			4,053				3,963				8,070				7,845
Provision for loan losses			77				112				212				144
Net interest income after provision for loan losses			3,976				3,851				7,858				7,701
Noninterest income:
Trust fees			86				94				170				217
Customer service fees			426				414				798				806
Earnings on bank-owned life insurance and annuities			112				112				218				236
Commissions from sales of non-deposit products			150				172				258				383
Income from unconsolidated subsidiary			48				51				96				93
Securities impairment charge			(226	)			(393	)			(226	)			(393	)
Gain on sale of securities			—				28				—				41
Gain on sales of other assets			27				59				33				53
Gain from life insurance proceeds			—				179				—				179
Prior period income from insurance sales			—				—				323				—
Other noninterest income			286				206				481				439
Total noninterest income			909				922				2,151				2,054
Noninterest expense:
Employee compensation expense			1,214				1,302				2,500				2,557
Employee benefits			411				255				855				692
Occupancy			236				240				475				472
Equipment			162				177				324				356
Data processing expense			337				337				670				671
Director compensation			108				113				218				227
Professional fees			90				85				211				169
Taxes, other than income			127				129				255				260
FDIC Insurance premiums			317				11				405				21
Amortization of intangibles			12				12				23				23
Other noninterest expense			301				284				570				538
Total noninterest expense			3,315				2,945				6,506				5,986
Income before income taxes			1,570				1,828				3,503				3,769
Provision for income taxes			405				431				928				970
Net income		$	1,165			$	1,397			$	2,575			$	2,799
Earnings per share
Basic		$	0.27			$	0.32			$	0.59			$	0.64
Diluted		$	0.27			$	0.32			$	0.59			$	0.64
Cash dividends declared per share		$	0.19			$	0.18			$	0.38			$	0.36
Weighted average basic shares outstanding			4,338,545				4,390,838				4,339,583				4,396,985
Weighted average diluted shares outstanding			4,342,086				4,398,055				4,343,850				4,404,367

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Amounts in thousands, except share data)

		Number																Accumulated
		of																Other								Total
		Shares				Common								Retained				Comprehensive				Treasury				Stockholders’
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance at December 31, 2008			4,341,055			$	4,746			$	18,324			$	34,758			$	(1,247	)		$	(8,096	)		$	48,485
Comprehensive income:
Net income															2,575												2,575
Change in unrealized losses on securities available for sale, net of reclassifica- tion adjustment and tax effects																			(17	)							(17	)
Total comprehensive income																											2,558
Cash dividends at $0.38 per share															(1,649	)											(1,649	)
Stock-based compensation activity											19																19
Purchase of treasury stock, at cost			(7,600	)																			(128	)			(128	)
Treasury stock issued for stock option and stock purchase plans			9,132								(49	)											182				133
Balance at June 30, 2009			4,342,587			$	4,746			$	18,294			$	35,684			$	(1,264	)		$	(8,042	)		$	49,418

		Number																Accumulated
		of																Other								Total
		Shares				Common								Retained				Comprehensive				Treasury				Stockholders’
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance at December 31, 2007			4,409,445			$	4,746			$	18,297			$	32,755			$	(557	)		$	(6,669	)		$	48,572
Comprehensive income:
Net income															2,799												2,799
Change in unrealized losses on securities available for sale, net of reclassifica- tion adjustment and tax effects																			(97	)							(97	)
Total comprehensive income																											2,702
Implementation of EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”															(480	)											(480	)
Cash dividends at $0.36 per share															(1,584	)											(1,584	)
Stock-based compensation activity											24																24
Purchase of treasury stock, at cost			(27,155	)																			(566	)			(566	)
Treasury stock issued for stock option and stock purchase plans			3,863								(10	)											77				67
Balance at June 30, 2008			4,386,153			$	4,746			$	18,311			$	33,490			$	(654	)		$	(7,158	)		$	48,735

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Amounts in thousands)

		Six Months Ended June 30,
		2009				2008
Operating activities:
Net income		$	2,575			$	2,799
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			212				144
Provision for depreciation			309				338
Net (accretion) amortization of securities premiums (discounts)			97				83
Amortization of core deposit intangible			23				23
Amortization of deferred net loan costs			18				7
Deferral of net loan costs			(9	)			(6	)
Securities impairment charge			226				393
Net realized gains on sales of securities			—				(41	)
Losses (gains) on sales of other assets			(33	)			(53	)
Earnings on bank owned life insurance and annuities			(218	)			(236	)
Gain from life insurance proceeds			—				(179	)
Deferred income tax expense			(54	)			(59	)
Equity in earnings of unconsolidated subsidiary, net of dividends of $17 and $0			(79	)			(93	)
Stock-based compensation expense			19				24
Increase in accrued interest receivable and other assets			(163	)			(766	)
Increase (decrease) in accrued interest payable and other liabilities			552				(200	)
Net cash provided by operating activities			3,475				2,178
Investing activities:
Purchases of:
Securities available for sale			(31,937	)			(35,217	)
FHLB stock			—				(294	)
Premises and equipment			(86	)			(591	)
Bank owned life insurance and annuities			(68	)			(66	)
Proceeds from:
Maturities of and principal repayments on securities available for sale			21,568				26,995
Bank owned life insurance and annuities			35				37
Life insurance claims			—				438
Sale of other real estate owned			228				210
Sale of other assets			113				322
Net decrease in interest-bearing time deposits			—				200
Net (increase) decrease in loans receivable			6,528				(10,892	)
Net cash used in investing activities			(3,619	)			(18,858	)
Financing activities:
Net increase in deposits			15,226				9,585
Net increase (decrease) in short-term borrowings and securities sold under agreements to repurchase			(8,861	)			1,749
Cash dividends			(1,649	)			(1,584	)
Purchase of treasury stock			(128	)			(566	)
Treasury stock issued for employee stock plans			133				67
Net cash provided by financing activities			4,721				9,251
Net increase (decrease) in cash and cash equivalents			4,577				(7,429	)
Cash and cash equivalents at beginning of period			12,457				20,524
Cash and cash equivalents at end of period		$	17,034			$	13,095
Supplemental information:
Interest paid		$	3,841			$	4,936
Income taxes paid		$	700			$	1,175
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned and repossessed assets		$	524			$	—

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Basis of Presentation and Accounting Policies

The financial information includes the accounts of Juniata Valley Financial Corp. (the “Corporation”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. For comparative purposes, the June 30, 2008 balances have been reclassified to conform to the 2009 presentation. Such reclassifications had no impact on net income. Operating results for the six-month period ended June 30, 2009, are not necessarily indicative of the results for the year ended December 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2008.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2009 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through August 7, 2009, the date these consolidated financial statements were issued.

NOTE 2 – Recent Accounting Pronouncements

In June 2009, the FASB issued SFAS No. 165, Subsequent Events. This Statement introduces the concept of financial statements being available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date, that is, whether that date represents the date the financial statements were issued or available to be issued. This disclosure should alert all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. This Statement is effective for the Corporation for interim and annual reporting periods ending June 30, 2009 and after.

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140. This statement prescribes the information that a reporting entity must provide in its financial reports about a transfer of financial assets; the effects of a transfer on its financial position, financial performance and cash flows; and a transferor’s continuing involvement in transferred financial assets. Specifically, among other aspects, SFAS 166 amends Statement of Financial Standard No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, or SFAS 140, by removing the concept of a qualifying special-purpose entity from SFAS 140 and removes the exception from applying FIN 46(R) to variable interest entities that are qualifying special-purpose entities. It also modifies the financial-components approach used in SFAS 140. SFAS 166 is effective for fiscal years beginning after November 15, 2009. We have not determined the effect that the adoption of SFAS 166 will have on our financial position or results of operations.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This statement amends FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51, or FIN 46(R), to require an enterprise to determine whether it’s variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS 167 also amends FIN 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. SFAS 167 is effective for fiscal years beginning after November 15, 2009. We have no variable interest entities and do not believe that the adoption of SFAS 167 will impact our financial position or results of operations.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, to establish the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. We do not expect the adoption of this standard to have an impact on our financial position or results of operations.

NOTE 3 – Comprehensive Income

U.S. generally accepted accounting principles require that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income.

The components of comprehensive income and related tax effects are as follows (in thousands):

		Three Months Ended June 30, 2009												Three Months Ended June 30, 2008
		Before				Tax Expense								Before				Tax Expense
		Tax				or				Net-of-Tax				Tax				or				Net-of-Tax
		Amount				(Benefit)				Amount				Amount				(Benefit)				Amount
Net income		$	1,570			$	405			$	1,165			$	1,828			$	431			$	1,397
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities:
Unrealized losses arising during the period			(33	)			(11	)			(22	)			(1,118	)			(380	)			(738	)
Unrealized gains (losses) from unconsolidated subsidiary			7				—				7				(14	)			—				(14	)
Less reclassification adjustment for:
losses included in net income			—				—				—				(28	)			(10	)			(18	)
securities impairment charge			226				77				149				393				134				259
Other comprehensive income (loss)			200				66				134				(767	)			(256	)			(511	)
Total comprehensive income		$	1,770			$	471			$	1,299			$	1,061			$	175			$	886

		Six Months Ended June 30, 2009												Six Months Ended June 30, 2008
		Before				Tax Expense								Before				Tax Expense
		Tax				or				Net-of-Tax				Tax				or				Net-of-Tax
		Amount				(Benefit)				Amount				Amount				(Benefit)				Amount
Net income		$	3,503			$	928			$	2,575			$	3,769			$	970			$	2,799
Other comprehensive loss:
Unrealized gains (losses) on available for sale securities:
Unrealized losses arising during the period			(262	)			(89	)			(173	)			(497	)			(169	)			(328	)
Unrealized gains (losses) from unconsolidated subsidiary			7				—				7				(1	)			—				(1	)
Less reclassification adjustment for:
losses included in net income			—				—				—				(41	)			(14	)			(27	)
securities impairment charge			226				77				149				393				134				259
Other comprehensive loss			(29	)			(12	)			(17	)			(146	)			(49	)			(97	)
Total comprehensive income		$	3,474			$	916			$	2,558			$	3,623			$	921			$	2,702

NOTE 4 – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

		Three Months				Three Months
		Ended				Ended
(Amounts, except earnings per share, in thousands)		June 30, 2009				June 30, 2008
Net income		$	1,165			$	1,397
Weighted-average common shares outstanding			4,338				4,391
Basic earnings per share		$	0.27			$	0.32
Weighted-average common shares outstanding			4,338				4,391
Common stock equivalents due to effect of stock options			4				7
Total weighted-average common shares and equivalents			4,342				4,398
Diluted earnings per share		$	0.27			$	0.32

		Six Months				Six Months
		Ended				Ended
		June 30, 2009				June 30, 2008
Net income		$	2,575			$	2,799
Weighted-average common shares outstanding			4,340				4,397
Basic earnings per share		$	0.59			$	0.64
Weighted-average common shares outstanding			4,340				4,397
Common stock equivalents due to effect of stock options			4				7
Total weighted-average common shares and equivalents			4,344				4,404
Diluted earnings per share		$	0.59			$	0.64

NOTE 5 – Commitments, Contingent Liabilities and Guarantees

In the ordinary course of business, the Corporation makes commitments to extend credit to its customers through letters of credit, loan commitments and lines of credit. At June 30, 2009, the Corporation had $43,884,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $47,738,000 at December 31, 2008.

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, all letters of credit have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had outstanding $979,000 and $639,000 of letters of credit commitments as of June 30, 2009 and December 31, 2008, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of June 30, 2009 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

NOTE 6 – Defined Benefit Retirement Plan

The Corporation had a defined benefit retirement plan covering substantially all of its employees, prior to January 1, 2008. Effective January 1, 2008, the plan was amended to close the plan to new entrants. The benefits are based on years of service and the employees’ compensation. The Corporation’s funding policy is to contribute annually the maximum amount that can be deducted for federal income taxes purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Corporation has made no contributions in the first six months of 2009 and does not expect to contribute to the defined benefit plan in the remainder of 2009. Pension expense included the following components for the three and six month periods ended June 30, 2009 and 2008:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
(Dollar amounts in thousands)		2009				2008				2009				2008
Components of net periodic pension cost
Service cost		$	47			$	45			$	94			$	90
Interest cost			112				110				224				220
Expected return on plan assets			(115	)			(106	)			(230	)			(212	)
Amortization of prior service cost			(1	)			—				(1	)			—
Additional recognized amounts			40				9				80				18
Net periodic pension cost		$	83			$	58			$	167			$	116

NOTE 7 – Acquisition

In 2006, the Corporation acquired a branch office in Richfield, PA. The acquisition included real estate, deposits and loans. The assets and liabilities of the acquired business were recorded on the consolidated statement of financial condition at their estimated fair values as of September 8, 2006, and their results of operations have been included in the consolidated statements of income since such date.

Included in the purchase price of the branch was goodwill and core deposit intangible of $2,046,000 and $449,000, respectively. The core deposit intangible is being amortized over a ten-year period on a straight line basis. During the first six months of 2009 and 2008, amortization expense was $23,000. Accumulated amortization of core deposit intangible through June 30, 2009 was $128,000. The goodwill is not amortized, but is measured annually for impairment.

NOTE 8 – Investment in Unconsolidated Subsidiary

The Corporation owns 39.16% of the outstanding common stock of The First National Bank of Liverpool (FNBL), Liverpool, PA. This investment is accounted for under the equity method of accounting, as defined in Accounting Principles Board Opinion No. 18. The investment is being carried at $3,270,000 as of June 30, 2009. The Corporation increases its investment in FNBL for its share of earnings and decreases its investment by any dividends received from FNBL. A loss in value of the investment which is other than a temporary decline will be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity which would justify the carrying amount of the investment.

NOTE 9 – Securities

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). FSP FAS 115-2 and FAS 124-2 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

In instances when a determination is made that an other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, FSP FAS 115-2 and FAS 124-2 changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income. This FSP is effective for the Corporation for interim and annual reporting periods ending June 30, 2009 and after.

The amortized cost and fair value of securities as of June 30, 2009 and December 31, 2008, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

		June 30, 2009
										Gross				Gross
Securities Available for Sale		Amortized				Fair				Unrealized				Unrealized
Type and maturity		Cost				Value				Gains				Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
Within one year		$	3,000			$	3,028			$	28			$	—
After one year but within five years			23,490				23,658				174				(6	)
			26,490				26,686				202				(6	)
Obligations of state and political subdivisions
Within one year			7,191				7,206				15				—
After one year but within five years			33,945				34,848				907				(4	)
After five years but within ten years			2,069				2,126				57				—
			43,205				44,180				979				(4	)
Corporate notes
After one year but within five years			1,000				996				—				(4	)
			1,000				996				—				(4	)
Mortgage-backed securities			1,648				1,750				102				—
Equity securities			984				719				8				(273	)
Total		$	73,327			$	74,331			$	1,291			$	(287	)

		December 31, 2008
										Gross				Gross
Securities Available for Sale		Amortized				Fair				Unrealized				Unrealized
Type and maturity		Cost				Value				Gains				Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
Within one year		$	4,627				4,732 $			$	105			$	—
After one year but within five years			19,961				20,236				275				—
			24,588				24,968				380				—
Obligations of state and political subdivisions
Within one year			3,571				3,593				22				—
After one year but within five years			27,622				28,343				727				(6	)
After five years but within ten years			3,485				3,579				95				(1	)
			34,678				35,515				844				(7	)
Corporate notes
After one year but within five years			1,000				957				—				(43	)
			1,000				957				—				(43	)
Mortgage-backed securities			1,803				1,867				64				—
Equity securities			1,210				1,014				29				(225	)
Total		$	63,279			$	64,321			$	1,317			$	(275	)

In accordance with the disclosure requirements of EITF 03-01, the following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at June 30, 2009 and December 31, 2008 (in thousands):

		Unrealized Losses 06/30/2009
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations		$	3,052			$	(6	)		$	—			$	—			$	3,052			$	(6	)
Obligations of state and political subdivisions			3,229				(4	)			—				—				3,229				(4	)
Corporate and other securities			—				—				996				(4	)			996				(4	)
Debt securities			6,281				(10	)			996				(4	)			7,277				(14	)
Equity securities			501				(222	)			120				(51	)			621				(273	)
Total temporarily impaired securities		$	6,782			$	(232	)		$	1,116			$	(55	)		$	7,898			$	(287	)

		Unrealized Losses 12/31/2008
		Less Than 12 Months								12 Months or More								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Obligations of state and political subdivisions		$	1,016			$	(7	)		$	—			$	—			$	1,016			$	(7	)
Corporate and other securities			957				(43	)			—				—				957				(43	)
Debt securities			1,973				(50	)			—				—				1,973				(50	)
Equity securities			743				(181	)			99				(44	)			842				(225	)
Total temporarily impaired securities		$	2,716			$	(231	)		$	99			$	(44	)		$	2,815			$	(275	)

The unrealized losses noted above are considered to be temporary impairments. Decline in the value of our debt securities is due only to interest rate fluctuations, rather than erosion of quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. As management has the intent and ability to hold these investments until market recovery or maturity, none of the debt securities are deemed to be other-than-temporarily impaired. There is one debt security that has had unrealized losses for more than 12 months. This corporate note has a maturity date in February 2012, representing approximately 1.6% of the total debt securities amortized cost as of June 30, 2009.

Equity securities owned by the Company consist of common stock of various financial services providers (“Bank stocks”) that have traditionally been high-performing stocks prior to 2008. During 2008 and into 2009, market values of most of the Bank stocks have materially declined. As part of the quarterly analysis performed to assess impairment of its investment portfolio, management has determined that some of the unrealized losses in the Bank stock portfolio are “other than temporary”. Considerations used to determine other-than-temporary impairment status to individual holdings include the length of time the stock has remained in an unrealized loss position, and the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent news that would affect expectations for recovery or further decline. In the second quarter of 2009, a total of $226,000 was recorded as an other-than-temporary impairment charge on two of the 17 Bank stocks held.

We understand that stocks can be cyclical and will experience some down periods. Historically, bank stocks have sustained cyclical losses, followed by periods of substantial gains. When market values of the Bank stocks recover, accounting standards do not allow reversal of the other-than-temporary impairment charge until the security is sold, at which time any proceeds above the carrying value will be recognized as gains on the sale of investment securities.

NOTE 10 – Fair Value Measurements

Effective January 1, 2008, the Corporation adopted the provisions of SFAS No 157, Fair Value Measurements for financial assets and financial liabilities and on January 1, 2009, adopted the provision for non-financial assets and non-financial liabilities. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4). FASB Statement 157, Fair Value Measurements, defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. FSP FAS 157-4 provides additional guidance on determining when the volume and level of activity for the asset or liability has significantly decreased. The FSP also includes guidance on identifying circumstances when a transaction may not be considered orderly.

FSP FAS 157-4 provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with Statement 157.

This FSP clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The FSP provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. This FSP is effective for the Corporation for interim and annual reporting periods ending June 30, 2009 and after.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not to be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

SFAS 157 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, SFAS 157 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Corporation’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Corporation obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Equity securities classified as available for sale are reported at fair value using Level 1 inputs.

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Other Real Estate Owned. Assets included in other real estate owned are reported at fair value on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of similar properties in the proximate vicinity.

The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2009 and December 31, 2008, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands).

										(Level 2)
						(Level 1)				Significant				(Level 3)
						Quoted Prices in				Other				Significant Other
						Active Markets for				Observable				Unobservable
		June 30, 2009				Identical Assets				Inputs				Inputs
Measured at fair value on a recurring basis:
Equity securities available-for-sale		$	719			$	719			$	—			$	—
Debt securities available-for-sale			73,612								73,612				—
Measured at fair value on a non-recurring basis:
Impaired loans			1,104				—				—				1,104
Other real estate owned			594				—				—				594

										(Level 2)
						(Level 1)				Significant				(Level 3)
						Quoted Prices in				Other				Significant Other
						Active Markets for				Observable				Unobservable
		December 31, 2008				Identical Assets				Inputs				Inputs
Measured at fair value on a recurring basis:
Equity securities available-for-sale		$	1,014			$	1,014			$	—			$	—
Debt securities available-for-sale			63,307								63,307				—
Measured at fair value on a non-recurring basis:
Impaired loans			—				—				—				—
Other real estate owned			305				—				—				305

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, SFAS 157 was applicable to these fair value measurements beginning January 1, 2009 and were not significant at June 30, 2009.

Fair Value of Financial Instruments

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1 and APB 28-1 amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for the Corporation for interim and annual reporting periods ending June 30, 2009 and after.

The estimated fair values of the Corporation’s financial instruments are as follows (in thousands):

Financial Instruments
(in thousands)

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and due from banks		$	9,282			$	9,282			$	12,264			$	12,264
Interest bearing deposits with banks			252				252				193				193
Federal funds sold			7,500				7,500				—				—
Interest bearing time deposits with banks			5,325				5,483				5,325				5,471
Securities			74,331				74,331				64,321				64,321
Restricted investment in FHLB stock			2,197				2,197				2,197				2,197
Total loans, net of unearned interest			305,249				313,069				312,522				323,289
Accrued interest receivable			2,544				2,544				2,315				2,315
Financial liabilities:
Non-interest bearing deposits			51,663				51,663				54,200				54,200
Interest bearing deposits			320,594				322,816				302,831				306,500
Securities sold under agreements to repurchase			1,718				1,718				1,944				1,944
Short-term borrowings			—				—				8,635				8,635
Long-term debt			5,000				5,041				5,000				5,021
Other interest bearing liabilities			1,118				1,122				1,096				1,096
Accrued interest payable			741				741				801				801
Off-balance sheet financial instruments:
Commitments to extend credit			—				—				—				—
Letters of credit			—				—				—				—